Monday, July 9, 2012

What's the Libor Scandal About?

You've probably heard the stories out of the U.K. about Barclays, one of the leading British banks, being forced to pay huge fines for manipulating the Libor (for London Interbank Offered Rate), which is the rate at which banks loan each other money. It might sound like a complicated, highly technical affair, but the effects are far-reaching.

To calculate Libor, member banks are supposed to report the rate at which they could realistically borrow money, based on the inter-bank offers it receives. But there have been stories that banks - and not just Barclays - were encouraged to report rates lower than those that had been offered, in order to keep rates reduced. 

A great number of institutional investment vehicles, including here in America, have their bond rates pegged to the Libor rate, as do mortgage rates, credit cards, and other loan rates. Many governments and municipalities have their debt rates set to float along with Libor, so if that rate changes, the amount that needs to be paid back on their bond offerings will often go up. The cost of manipulating Libor by just a few basis points can run into the millions of dollars for a debt offering - and may have put trillions into the banks' own coffers.

The head of Barclays has already resigned, and the bank has paid $450 million in fines. But this scandal appears to be far from over.

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